4.5.4 - macroeconomic policies in a global context Flashcards
What policies are used by governments to achieve goals?
- fiscal policy
- monetary policy
- supply side policy
- exchange rate policy
- direct controls
What government policies are used to reduce fiscal deficits and national debts?
- to reduce national debt, the government has been using a policy of austerity since 2010, where they have tried to decrease spending. It is also possible to increase taxes. These could limit growth, reduce living standards and income equality.
- others offer an alternative = demand stimulus by high spending, causing economic growth and higher tax revenues. This allows for budget surpluses and reduced national debt.
- another approach may be to rely on automatic stabilisers to allow growth, reducing fiscal deficit as a percentage of GDP
- the government may choose to default on their loans but this has a large economic cost
What government policies are used to reduce poverty and inequality?
- most people agree that some redistribution of income from rich to poor is needed. Some say high incomes and profits provide incentive, whilst others say those on lower incomes need more support
- a progressive tax system can be used to create a more equal distribution of income. Inheritance taxes reduce wealth inequality. However, some people may avoid paying taxes and it is difficult to enforce. Raising taxes has unintended consequences, such as reduced incentives and the Laffer curve
- government expenditure can be used in the form of benefits and transfer payments. Some argue that benefits reduce incentives to work if people could earn a similar income through their benefits
- governments can provide goods and services giving people equal opportunities and access to services eg, healthcare, education, housing. However, these can also benefit people on higher incomes and there is a large opportunity cost
- the government can try to reduce wage differences eg. national minimum wage improves the incomes of the poor and maximum wages can reduce the incomes of the rich. However, minimum wages cause unemployment
- improvements in access to education and training prevents poorer from achieving less and allowing them to enter well paid jobs
- price controls on essential goods eg. housing, bus fares, increases purchasing power of the poor. However this may cause excess supply and black markets can develop
- trickle down economics may be used, this argues that increased incomes of the rich increases incomes of the poor. The rich spend more, creating jobs and reducing their own incomes. They believe that inequality is necessary to encourage hard work
- law of diminishing marginal utility suggests that redistribution increases total utility, better allocating resources
What are the government policies related to changes in interest rate and money supply?
- central bank is able to change interest rates and money supply to control inflation or due to global issues. A fall in the bank rate will likely increase supply of money as there is more demand for loans
- it can be argued central banks don’t have complete control over money supply as they can’t control the ability of the financial system to create credit, also there has been a globalisation of the financial market
- most people argue that central banks should allow inflation caused by supply side shocks but manage demand side inflation
- following the financial crisis, some central banks were concerned about deflation, leading to quantitative easing as interest rates couldn’t be reduced further
What are some government policies used to increase international competitiveness?
- supply side measures can improve productivity and flexibility eg. taxes and deregulation. They can encourage competition, forcing firms to become efficient and competitive within the global market. They can place emphasis on quality of products and use tax incentives. Increased education improves the skills of the workforce and improves flexibility
- exchange rate policies may be used to control inflation and macroeconomic stability
- they can join the WTO or other trade agreements
What macroeconomic policies can be used to combat external shocks?
Globalisation is leading to increased interdependence, macroeconomic policies can be used to combat the effects of negative shocks eg. a commodity price shock such as a rapid increase in oil prices. The government could use expansionary policy to reduce the impact of a fall in GDP or they could use deflationary policy to reduce inflationary pressures. After the financial crisis, the government used expansionary policy to increase AD. Following Brexit, interest rates were lowered to improve confidence but then raised to combat inflation. Changes in exchange rates can cause inflation within the country, or a fall in growth and a trade deficit. Political instability, either in the UK or globally, will likely impact the economy and the government may need to take action.
Why are government policies needed in response to transnational companies?
- TNCs can bring huge gains to an economy through job creation, tax revenue, knowledge and investment
- However, they have negative socioeconomic impacts as they destroy local culture, impact the environment and withdraw profits rather than investing. They can also influence politicians to take decisions that favour them and may be involved in tax avoidance
- some developing countries don’t allow TNCs unless they set up a joint company with a local partner, so that some profits are retained in the economy
How can regulation of transfer pricing be used as a policy against transnational companies?
- transfer pricing means firms can engage in tax avoidance, when a firm produces a good in one country and transfers it to another to make it into another good which is sold
- if taxes are higher in the first country, they can set a low price on the product made and increase their profit in the low tax country to reduce their tax bill
- in the UK, companies which don’t allocate sufficient profits here are challenged by HMRC
- Transfer Pricing Guidelines were introduced, aiming for price to be the same as if two parties were independent of each other
How is the government’s ability to control global/transnational companies?
- difficult for governments to control TNCs. Small countries may earn less in revenue than TNCs earn in profits
- EU suffers from legal tax avoidance schemes
- solutions to taxation are extremely difficult as they require worldwide agreement. Any solution that would benefit countries like the UK lead to losses for lower income countries like the Bahamas. There may be division within countries, such as Democrats and Republicans in the US. This allows TNCs to prevent any agreement they don’t like through lobbying.
- solutions are time consuming and costly
What are some problems facing policy makers?
- inaccurate information
- risks and uncertainties
- external shocks
How is inaccurate information a problem for policy makers?
Information such as GDP figures could be inaccurate, meaning the government is unable to see economic problems. Cutting down on tax avoidance/evasion is difficult as the government doesn’t have the full picture. The Bank of England makes decisions based on past data, but trends may be changing so this is inaccurate, difficult for the bank to know which policies to take. Full cost-benefit analysis is time consuming and costly, which is impractical for the government
How are risks and uncertainties a problem for policy makers?
The government can’t accurately predict the future, difficult to know which policies are necessary. They can’t understand the full impact of their actions as consumers can react unexpectedly, undermining government policy. Managing risk is essential for good decision making
How are external shocks a problem for policy makers?
The government is unable to control and prepare for external shocks, the best they can do is lessen their impact. It may be difficult to know the best method to solve the problem. Policies employed may not have their intended impacts and may undermine current policies.
